In a report long on analysis and short on solutions, Sir James Crosby has told the Government there is no end in sight to the mortgage famine – and there is very little ministers can do about it.

Sir James, a former chief executive of HBOS, said in a letter to the Chancellor, Alistair Darling, that "a shortage of mortgage fin-ance will persist throughout 2008, 2009 and 2010", and the crisis will "take its toll" on the housing market and consumer spending.

Even in this interim review, Sir James in effect ruled out any sort of state guarantee in the mortgage market on the American model, because "I think it unlikely that it would be right to tackle this century's problems with last century's solution".

Recent problems affecting the big American mortgage corporations, Fannie Mae and Freddie Mac, have discredited the idea. But Sir James even poured cold water on some of the more modest options put forward in his own review, stating that "I doubt whether, on their own, such initiatives will do much to increase the demand for mortgage-backed securities".

With no great show of enthusiasm, the review notes proposals to reform the Bank of England's Special Liquidity Scheme, proposals to improve the transparency and attractiveness of mortgage-backed securities to lenders and international efforts to inject some confidence into the market.

The option of doing nothing is also explicitly on Sir James' agenda: "I should stress that I may yet recommend that the Government should not intervene in the market, on the grounds that such intervention would create more problems than it would solve."

The review will disappoint ministers, who hoped that he would offer more help in their stated political objective of being seen to be sympathetic towards "hard-working families".

The Liberal Democrat's shadow Chancellor, Vince Cable, said: "Sir James' caution towards government intervention in the housing market is welcome. It is critical that siren voices in the City don't seduce ministers into using taxpayers' money to underwrite new bank lending and reinflate unsustainable house prices.

"It is inevitable that pain will continue to be felt in the mortgage market for some time to come, but the answer is not to put more public money at risk which would only profit the banks. The Government should concentrate on helping families in danger of repossession. Ministers must allow councils to replenish their housing stock to meet rising demand."

Industry lobby groups tried to put a positive spin on a cautious document. Michael Coogan, director-general of the Council of Mortgage Lenders, said: "Without action, the situation in the housing market will be worse than it needs to be. The housing correction will overshoot, and the knock-on effects on the wider economy will be significant. The Crosby analysis ... creates a clear expectation of measures at the time of the pre-Budget report. We now look forward to working urgently with the Treasury over the summer on proposed solutions."

The CML has recently argued that the Bank of England should encourage the supply of new mortgages by accepting new mortgage-backed securities, whereas the current Bank arrangement is confined to older ones. The plan would involve the Bank offering a repo facility [secured lending], using as collateral new UK residential mortgage-backed securities. But to qualify, the securities would first have to be sold to investors in a public issue, so giving a market dimension to the solution. The invest-ors would take the credit risk in the usual way, but the connection with the Bank of England is designed to give them confidence, and so help to break the current vicious circle.

The Bank is thought to be thinking of ways to improve its Special Liquidity Scheme, but has set its face against any suggestion that it should be involved in the routine funding of new mortgage business. The Governor, Mervyn King, said in April that the SLS was not aimed at "kick-starting" the mortgage market. As it stands, the SLS imposes a penal rate of interest and a "haircut" on the capital value of the mortgage-backed security collateral it takes against a loan of gilts. Such a harsh set of terms would not attract many banks as a profitable way for them to finance their mortgage business in any case. The Crosby review notes the "significant fiscal and legal risks" in extending the SLS.

The Treasury commissioned Sir James in April, and his full report will be published at the time o f the pre-Budget report in the autumn. Mr Darling said then: "The basic problem you've got at the moment is that the mortgage companies, the banks and the building societies have found funding harder to raise because of what is happening in the fin-ancial markets generally."

Sir James suggests that there may be little that can be done to reverse the effects of a global credit crunch. "In time, these markets will stage some sort of recovery, but I am firmly of the opinion that, in the foreseeable future, there will be very little new issuance of UK mortgage-backed securities". Indeed, the IMF's Global Financial Stability Report this week warned that the crisis may even intensify, because "a bottom for the U S housing market is not visible". The Fund said that banks' balance sheets are under "renewed stress".

The Crosby Review's focus is on how to improve the banks' liquidity, but it recognises that much of the fall in lending has been likened to a more recent shortage of capital, only partly addressed by a range of desperate rights issues and restructurings throughout the banking sector: "Recent months have seen major capital-raising exercises but significant 'mark-to-market' adjustments and increasing credit losses mean that the adjustment to lower leverage will take years rather than months."

The review notes that the sort of extraordinary losses made by the banks as a result of the sub-prime crisis and the credit crunch are now being compounded by the more normal credit losses from the slowdown in the economy, a self-reinforcing and lethal combination both for the banks and the economy as a whole.

Moreover, even if the supply of mortgage finance were suddenly to improve, the demand for home loans is in decline. Sir James writes that "recent survey and anecdotal evidence suggest that demand among first-time buyers, in particular, has been weakening."

The Royal Institution of Chartered Surveyors recently reported new buyer enquiries at estate agents running at close to record lows. Softer demand and the effects of the Special Liquidity Scheme have helped ease retail mortgage rates slightly in recent weeks, though they are still high by recent standards.

The sheer size of the hole left by the collapse in the mortgage-backed security market is highlighted in the Crosby Review. Between 2000 and 2007, the total amount outstanding of UK residential mortgage-backed securities rose from £13bn to £257bn, with growth in amount outstanding in 2006 alone of £78bn.

Crosby Review: The options

1. Transparency andstandardisation

Investors have told Sir James that the complexity of some mortgage-backed securities has deterred them. The Report suggests that principles of "best practice" be adopted by the industry, leading to the establishment of a more straightforward and liquid market as investors come to trust the securities and their underlying assets. However, after the sub-prime debacle, mistrust is deep-seated.

2. The Gold Standard

An international effort to improve transparency and standardisation. "Consistency of approach", says the Report, with cross-border standards for these securities might help investor confidence still further, given that so much of the activity in the mortgage-backed securities market has been international in nature. Sir James also suggests moving from over-the-counterto exchange trading in these instruments, which again would be assisted by standardisation.

3. Reforming the SpecialLiquidity Scheme

The Review notes that parties such as the Council of Mortgage Lenders have suggested reforming or complementing the Bank of England's Special Liquidity Scheme. This would mean that new mortgage-backed securities would be eligible for the scheme, and could be swapped for gilts. However, the resistance from the Bank of England comes through clearly. In any case, the bank is likely to come forward with a new scheme of its own devising later in the autumn.

4. A government guarantee

This is the most ambitious of moves, and most likely to succeed, but also the one most fraught with risk and least likely to be adopted even by ministers desperate to restore life to the property market. The well-publicised troubles afflicting the most obvious model, the Freddie Mac and Fannie Mae corp-orations in the US, have also dampened enthusiasm for this option.

5. International action

Public and private sector bodies as varied as the G7, the EU, the Financial Stability Forum and the International Institute of Finance are undertaking "important work" on reforms to regulation that will enhance transparency, valuation and the reliability of credit ratings, all of which will help the MBS market return to life, but only in the long term.

6. Do nothing

Sir James is clear that "these markets will recover in time" and that "I may yet recommend that the Government should not intervene in the market, on the grounds that such intervention would create more problems than it would solve".